Good afternoon, ladies and gentlemen, and welcome to Morguard North American Residential Real Estate Investment Trust second quarter results conference call. (Operator Instructions) This call is being recorded on Thursday, August 1, 2019.

I would now like to turn the conference over to Paul Miatello. Please go ahead.

Thank you, operator, and thank you, everybody, for joining us today. I will chair the call for this afternoon, and I'll just introduce the people that are joining me today. So I have Chris Newman, Chief Financial Officer of the REIT; Angela Sahi, Senior Vice President; and John Talano, Vice President of U.S. Operations. Rai Sahi is expected to join us. He's just been detained a little bit, so we expect him to be here for the Q&A session.

So with that brief introduction, I will turn it over to Chris Newman to provide some commentary on the quarter.

Thank you, Paul. As is customary, I'll provide comments on the REIT's financial position and performance then open up the floor to your questions.

In terms of our financial position, the REIT completed the second quarter of 2019 with total assets amounting to $3.3 billion compared to $3 billion in December 2018.

During the quarter, the REIT sold a property located in Harahan, Louisiana, comprising 48 suites, for net proceeds of $1.6 million after the assumption and mortgages payable and also acquired a partial noncontrolling interest at 3 of the REIT's control -- properties controlled by the REIT located in Mississauga.

The REIT finished the second quarter of 2019 with $24.5 million of cash on hand and $14 million owing to Morguard Corporation under its $100 million revolving credit facility. The REIT completed the second quarter of 2019 with $1.1 billion of long-term debt obligations. There was no refinancing activity during the second quarter.

As at June 30, 2019, the REIT's overall weighted average term to maturity was 5.3 years, a decrease from 5.8 years at December 31, 2018. The REIT's weighted average interest rate also decreased to 3.48% compared to 3.49% at December 31, 2018.

The REIT continued to make progress in reducing its overall leverage. The REIT's debt to gross book value improved to 46.1% at June 30, 2019, from 47.9% at December 31, 2018. MRG had an IFRS net asset value of $26.29 per unit as at June 30, 2019, compared to the current market price just under $20, still reflecting a compelling entry point for investors.

Turning to the income statement. Net income of $41.9 million for the 3 months ended June 30, 2019, increased by $22.2 million compared to $19.7 million in 2018. The increase was primarily due to an increase in NOI lower interest expense and noncash changes mainly from a lower fair value loss on Class B LP units and a decrease in deferred income taxes, which was partly offset by lower fair value gain on real estate properties.

NOI of $39 million for the 3 months ended June 30, 2019, increased by $0.7 million or 1.7% compared to 2018. Same-property-proportionate NOI in Canada increased by $0.2 million or 1.6%, and in the U.S., increased by USD 0.1 million or 0.4% compared to 2018.

Interest expense decreased by $0.5 million for the 3 months ended June 30, 2019, compared to 2018. And excluding noncash fair value adjustments, interest expense [increased] by $0.1 million primarily due to the disposal of the 5 Louisiana properties.

The REIT's second quarter performance has translated into basic FFO of $15.7 million, in line with 2018. On a per unit basis, FFO was $0.31 per unit for the 3 months ended June 30, 2019, compared to $0.31 per unit in 2018. The change in the foreign exchange rate had a $0.01 per unit positive impact, which was offset by a negative impact of $0.01 per unit from the disposal of the 5 Louisiana properties. The REIT's FFO payout ratio was 55.1% for the 3 months ended June 30, 2019, a very conservative level, which allows for significant cash retention.

Operationally, the REIT had a successful quarter, with average monthly rents in Canada increasing to $1,399, reflecting the quality of our Canadian portfolio and translates into an overall 4% increase in rent levels over 2018. During the 6 months ended June 30, 2019, the Canadian portfolio turned over 7.4% of total suites in Canada and achieved 16.7% AMR growth on suite turnovers. While in the U.S., same-property AMR increased by 3%, having an average monthly rent of USD 1,319 at the end of the second quarter of 2019 compared to USD 1,280 at the end of Q2 2018.

The REIT continues to report strong occupancy, with Canada finishing the second quarter at 98.8% compared to 99.2% a year earlier. Same-property occupancy in the U.S. continues to improve over last year as occupancy increased to 95.2% from 94.1% in 2018.

And during the year, the REIT's total CapEx amounted to $10.5 million. That included common area projects and revenue-enhancing in-suite improvements and energy initiative projects.

I'll now turn the call back over to the moderator, who will open up the lines for questions.

Sure. I would say the bulk of it or the largest contributors are increases in property taxes. So that's the municipalities marking our assets to market, and that, I think, is the biggest driver of the increases and decreased margin there. We also are in a very, very tight labor market in the U.S. as well, so that has pushed up our personnel costs. Actually, at some of the newer acquisitions this time last year, we were understaffed, so we had several positions that were open, and those are actually filled today, so we are stable. But that certainly has increased our overall cost. At the same time, we did go through a aggressive increase in occupancy, so those costs also impacted our expenses this quarter as well. But we're in a great position right now. We're in our busiest season and our occupancies are right where we want them. So we're in good shape.

It has been going very well. Our U.S. portfolio is actually 98% leased today, so we're in great shape. Again, it's our busiest season, and we do have some high turnover during these months. But with a lot less to leave this year over last, we're in a great spot.

I just had 2 quick questions regarding the U.S. dollar and Canadian dollar volatility going forward. I wanted to understand what is your strategy and the outlook on the U.S. dollar volatility and how it will affect your earnings going forward. And what are the methods or mechanisms you've put in place to offset that or to save kind of yourselves from that?

In terms of U.S. dollar and Canadian dollar, I mean, we've been pretty transparent on that since the IPO back in 2012. So our position is that we don't implement any hedging program. So we are sort of naked and exposed to that volatility. But having said that, anything we buy in the U.S., we're obviously putting a U.S. dollar mortgage against that. So I mean, we're exposed to the extent of our equity. But our internal policy historically and currently has been not to implement any hedging program.

I mean some cash flow comes across the border. I mean we retain a fair amount of cash in the U.S. for capital expenditures and for future acquisition opportunities. So to say it all comes back isn't quite an accurate representation. And in terms of reporting, I mean the fluctuation quarter-to-quarter historically has had a pretty small impact on reported FFO, and I don't know if Chris has the number for this quarter, but it's typically less than $0.03 FFO per quarter and it's usually more like $0.01 to $0.02. That -- obviously, that could be up or down, depending on how the Canadian dollar is strengthening or weakening, obviously. But it's usually and historically a very muted impact, but I guess that in the range of $0.01 to $0.02 per quarter FFO.

Sure. The property is currently under construction, and we did uncover some structural and some waterproofing issues that we have been addressing. That, as we've been replacing the windows, has delayed us a bit. We expect to start leasing up towards the end of the year, but that is a relatively small property. It's only 114 units. So the lease-up itself should take less than 12 months.

Sure. The places where we're seeing the most supply are really in Chicago and in Washington, D.C. and South Florida. The majority of our South Florida assets are outside of the areas where most of that new supply is coming from. So there's very little impact there. In Chicago specifically, we worked very aggressively over the winter months to maintain very high occupancy. So in the past, we would dip down significantly, even in the high 80s, over the winter months just because no one's moving and that steady supply has kept coming in. But this year, we maintained a 94% to 95% average.

So the number of incentives have been reduced significantly. Those properties today are also doing very well in terms of occupancies. In D.C., specifically in Rockville, we had significant supply that was coming online directly near our assets, and we had struggled with incentives there and occupancies as well. But we have worked through that as well, and our lease percentage there has bumped up to, I believe, it's 97% today. So we're doing very well there. The most significant supply really has been in Chicago, but we are close to being over the hump there, and the development pipelines have definitely flowed in all markets, actually, in Chicago, and South Florida as well as in D.C.

All right. And this question is for Rai. You guys have been pretty quiet in terms of acquisitions. So just trying to understand whether you guys are not seeing the kind of product you like. Or like what is holding you guys back?

Well, we're just watching the market. We keep looking within the market. Definitely, there's not much available in Canada. We look at a few things, which doesn't -- not compatible with our quality of assets. In the U.S., it's just -- we're looking a bunch of things. Something might happened, but at this stage, we're comfortable in staying where we are.

We're -- sorry, this is Angela. We're pushing rents as much as we can on turnover. So for example, for the quarter, it's like almost 18% is where we can push the rents on turnover, but as you know, as you're aware, in Canada, it's -- the occupancy is quite strong as it is, and it's hard to turn over the units.

But have you guys looked at how far the market rent is? Because your turnover rate has come down materially, so you won't be able to capture all of that, but just wondering if you guys did that analysis.

No. Listen, we're always doing the analysis and all that. So sometimes becomes a bit of speculation, and depending on the turnover, so it's really (inaudible). Basically, in Canada, we don't do (inaudible) in Mississauga (inaudible) lease side. So...